Q3 2022 Pinnacle West Capital Corp Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the Pinnacle West Capital Corporation, 2022 third quarter earnings Conference call.
At this time, all participants have been placed on a listen only mode and we will open the floor for your questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host Amanda Ho.
Ma'am the floor is yours.
Thank you, Matt I would like to thank everyone for participating in this conference call and webcast to review our third quarter 2022 earnings recent developments and operating performance. Our speakers today will be chairman and CEO just go in there and our CFO , Andrew Cooper, Ted Geisler E. P S President and Jacobs Hello, Executive Vice President operations are also here with us.
First I need to cover a few details with you the slides that we will be using are available on our investor Relations website, along with our earnings release and related information today's comments and slides contain forward looking statements based on current expectations and actual results may differ materially from expectations. Our third quarter 2022 Form 10-Q was filed this morning. Please refer.
To that document for forward looking statements cautionary language as well as the risk factors and MD&A sections, which identify risks and uncertainties that could cause actual results to differ materially from those contained in our disclosures a replay of this call will be available shortly on our website for the next 30 days. It will also be available by telephone through November 10, 2022 I will.
Now I'll turn the call over to Jeff. Thank.
Thank you Amanda and thank you all for joining us today.
We continue to execute well on our operating performance and financial management. So it was part of my operations update I'll share with you our success in managing through one of the most challenging start to summer storm season that we've had in recent history.
I'll also provide an overview of our rate case filing and then Andrew will review, our financial performance, including an update to our earnings expectations for the year due to higher sales growth and weather.
Firstly, and very importantly, I want to recognize our field teams for doing an exceptional job safely and quickly bringing customers back online after heavy storm swept through different parts of the state this summer.
The extreme weather brought on damaging winds heavy rains and flash flooding, which created a challenging environment, where we saw a record number of colds damaged.
And that's how we usually measure the intensity of the summer storm season.
Typically.
A storm season will see an average of about 300 pulse damage. This year, we replaced over 800.
Many teams across the company work together to restore service from our supply chain teams getting the necessary supplies, our field crews working day and night and our employees communicating with customers and making sure that they were kept apprised of the restoration efforts.
Our careful long term planning resource adequacy flexibility and innovative customer programs also proved beneficial through the summer.
<unk> reached the third highest peak demand of 70 587 megawatts on July 11th and the temperature on that day was only and I put that in quotes only 115 degrees compared to our typical peak temperatures of 117 degrees or higher.
Generally every degree is worth about 140 megawatts of peak demand. So had we seen a 117 degrees, we would've easily set a new record for Acs energy demand this year.
In addition in early September a heat wave hit the southwest in the region. Once again saw the lack of available capacity, resulting in 15 declarations of energy emergencies by other utilities across the west.
During this period, we served our customers reliably and also helped our neighboring utilities by making off system sales to the western wholesale market.
Those off system sales directly benefit Acs customers by lowering our overall costs, while helping to maintain regional grid stability.
For our own reliability, our base load and fast ramping assets, including four corners aka <unk> and Palo Verde, we're ready when we needed them.
Our non nuclear generation fleets equivalent availability factor Eas and Thats. The percentage of time that are generating unit is available and ready to perform when called upon was.
It was 95% from June through September .
Alberta generating stations capacity factor for the same timeframe was 102%.
Finally, with this completion of the summer run Palo Verde three safely entered its planned refueling outage on October 8th and we're getting ready to complete that outage in the next few days.
I'm also happy to share that Acs continues to make quartile gains in every single driver of residential customer satisfaction and that overall satisfaction is above industry benchmarks.
When compared to the company's large investor owned peers.
Continuing the progress that the company has been making over the last two years Aps's J D power residential ranking through the third quarter firmly places the company into the second quartile.
For residential customer satisfaction.
Our strongest performing drivers through the first three quarters of 2022, where customer care, both phone and digital power quality and reliability corporate citizenship and billing and payment.
Additionally, aps's JD power business customer mid year results puts the company in the first quartile nationally.
ACS continues to be one of the most improved utilities in the nation for both residential and business customer satisfaction.
And we've committed to our customers shareholders and our regulators that a top focus of improvement for our team will be improving the customer experience. That's been a cornerstone of <unk> strategy as CEO and I'm incredibly proud of our employees are proud of our progress so far and looking forward to closing out this year strong.
Turning to the topic that is certainly top of mind to many of US the inflation reduction act, while we continue to evaluate the potential of the legislation as the regulations are being written.
Tax benefits provide an opportunity to make Arizona, a leader in clean investments.
You have that provisions that will benefit Aps customers. The most include the creation of an eight year production tax credit for existing nuclear facilities.
The inclusion of the EV and EV infrastructure tax credits.
New credits for storage and hydrogen 10, plus year extension of the clean energy tax credits and a three year extension of the existing PTC and ITC.
Each of these represents a big win for customers and for our industries.
These incentives will help us to meet our clean energy commitment and they will help us to enable the clean energy transition without compromising reliability and affordability.
For a regulatory update we filed a rate case on October 28 2022.
The key components of that filing included a request of 10, 5% return on equity.
A 1% return on a fair value increment 50, 193% equity layer and 12 months post test year plant.
We've requested an increase in annual revenue of approximately $460 million and we proposed new rates go into effect on December one 2023.
This is an important rate case that supports investments in our clean our energy infrastructure to ensure that our customers continue to receive the reliability that they count on.
And to increase resiliency under all weather conditions.
We've made essential investments to maintain the health of the energy grid and to avoid outages. This.
This rate case also helps to ensure that Arizona have access to the energy they need when they need it as we make a reasonable and affordable transition to a clean energy future.
We're securing the energy needs of Arizona without compromising on affordability or reliability for balancing investments that optimize existing resources with investments and cost competitive clean energy generation that will power our state's future.
Our filing contains proposals to further support our customers. After a lot of work with stakeholders, we're proposing to enhance our limited income Bill discount program to provided an additional discount for customers with the greatest need.
And we're also proposing to eliminate in network credit card and in person kiosks payment fees for our customers program programs and proposals like this demonstrate our commitment to improve customer satisfaction and make transacting with us more seamless and convenient.
And lastly, we heard the commission's request for simplifying our adjusters and in response, we proposed a number of modifications to our suite of adjustment mechanisms spur.
Specifically, we proposed reducing the number of adjustment mechanisms from 7% to four active adjustors.
The elimination of the lost fixed cost recovery mechanism and the environmental improvements surcharge.
We also propose to modify our renewable energy surcharge mechanism to allow Aps to invest in clean energy projects to support Arizona's growth.
While reducing the frequency of rate cases, and smoothing out the financial impacts of the new projects.
With this adjustment mechanism tax credits from legislation like the IRA can reduce the overall cost of these investments and we would be able to pass those savings to customers more quickly through an adjuster.
Finally, we're not proposing any changes to our current power supply adjuster transmission costs jester.
As we look to wrap up 2022, our focus and priorities remain on improving our customer experience continuing to engage with stakeholders to build alignment.
And executing on our mission of providing clean reliable and affordable service to our customers. So I want to thank you all again for your time today and I'll turn the call over to Andrew.
Thank you, Jeff and thanks, again to everyone for joining us today.
I will cover our third quarter results, including the impact from weather.
Also provide additional details around our customer and sales growth O&M as well as our expectations for the remainder of 2022.
We earned $2 88 per share in the third quarter this year down 12% compared to the third quarter last year, but above our original expectation.
As has been the case all year the unfavorable rate case decision is the driver for lower year over year results specifically the reduction to net income from no longer deferring the costs related to the four corners, SCR and the Akatea modernization project other negative year over year impacts include lower <unk> revenues higher.
Higher depreciation and amortization and higher interest expense partial offsets this quarter to these negative drivers were lower income tax expense continued customer and sales growth and weather.
Whether it was a significant benefit this quarter compared to last year third quarter 2021 was extremely mild.
Resulting in a large negative impact on margins third quarter. This year was slightly warmer overall, the normal and coupled with higher humidity resulted in a <unk> 23 benefit to margin on.
Customer growth third quarter remained in line with our guidance at 2%.
In addition, we have experienced strong weather normalized sales growth all year.
Third quarter saw an increase of one 3% driven by C&I sales growth of four 9%, partially offset by a decline in residential usage. We are no longer experiencing increased usage impacts from COVID-19 work from home trends.
<unk> sales growth in 2022 has largely been driven by strong sales among a diverse set of small C&I customers and from ongoing expansion of several large C&I customers do.
Due to the beneficial weather and strong sales and customer growth. We are updating our full year 2022 earnings guidance to $4 20 to.
To $4 35 per share.
I'll note that without the weather benefit we would've expected to be in line with our original guidance as our sales growth would have offset our increase in O&M, which I will talk about later.
Turning to the economy here in Arizona, Maricopa County residential housing permits started the year off to a fast pace and are trending to finish 2022 at a level comparable to levels seen in 2000 22021. Despite macroeconomic risks we continue to project steady population growth largely driven by net migration along with solid Aps customer.
Growth.
Importantly, our growth is not solely reliant on residential housing where construction as the increase in business segments, such as semiconductors electric vehicle manufacturing and data centers provide increased diversity in our customer base. In fact in October aligned Datacenters announced an expansion of an additional 2 million square feet over.
Two sites.
Turning to O&M, we continue to experience cost inflation, which is affecting all areas of the business. Our O&M levels are further impacted by the need to serve the significant growth in our service territory.
As a result, we have experienced cost increases in categories, including chemicals contract services equipment and materials, we've been able to mitigate much of these cost increases through our customer affordability and lean efforts. In addition, similar to past years, the increased sales volumes and pension benefits have allowed us to flex up on spending to relieve some of those.
Cost pressures and Derisk future O&M spend.
As such we are adjusting our O&M guidance for the year and expect our O&M to fall within the range of $880 million to $895 million, while our total O&M is increasing in the near term, we still expect our O&M per megawatt hour to the decline over the long term, we remain focused on O&M and we continue to look for opportunities.
To create efficiencies reduce risk and keep our costs low to maintain affordable rates for our customers.
Finally, I will briefly touch upon our liquidity and financial health as the Federal Reserve continues to raise interest rates to try to combat inflation, we are closely monitoring our financing needs.
We continue to maintain a strong balance sheet and a well funded pension and I would highlight that Aps does not have any long term debt maturities until mid 2024 and limited floating rate debt.
A couple of weeks ago, our board approved a one 8% increase in our quarterly dividend per share.
Prior dividend for 10 consecutive years and continue that trend this year.
We continue to be confident in our plan and intend to grow back into our long term dividend payout ratio target of $65 to 75% in the future.
We are grateful to be able to service date that continues to grow and thrive and the weather tailwind. This year will allow us to derisk, our O&M expenses, while enhancing the financial resources available.
The quality of our service and maintain our record for providing top tier reliability.
As Jeff mentioned, we will continue to focus on our regulatory outcomes, while executing our long term plan to deliver value for our customers and for our shareholders. This concludes our prepared remarks I will now turn the call back over to the operator for questions.
Certainly ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time.
We do ask that while posing your question. Please pickup your handset listening on speaker phone.
The company policy.
Once again, if you have any questions or comments. Please press star one on your phone.
Okay.
Okay.
Okay.
Your first question is coming from Nick Campanella from Credit Suisse.
Your line is live.
And make your own you're on it.
A neck you there.
Next question is coming from <unk> Kim from Goldman Sachs. Your line is live.
Thank you.
First question on the the IRA and just clean energy transition. Thank you for the commentary on that I know, it's a little bit earlier.
We have the regulatory proceeding going but as you think about that.
The IRI impact on the various generation resources and what you had laid out so far in terms of the all source RFP through.
Through 'twenty seven and beyond.
How does this change.
Changed whether in terms of magnitude or just timing of what you had.
Laid out so far.
Okay.
AMC, we've got a we've got a current IR team moving forward right now that I think we will probably continue we may be able to see some some benefits ultimately in that but thats largely.
We're going to be focused given where we are on on probably ppas.
So I think the real benefit to us in this kind of the key that I was trying to emphasize in that.
And the commentary is that if we can.
Use the react that renewable energy adjuster to pass through the tax benefits concurrently with the investment at.
It really unlocks value for customers because then.
Subsequent rfps when we're pursuing those we can pursue the most advantageous long term investments for our customers and be able to better mix the owned versus PPA.
And again, I think the benefit of being able to flow those tax credits in the other incentives through the through an adjustment mechanism means youre not waiting multiple years to rate cases before you can get that benefit to customers at the same time you are smoothing out the rate impact. So it's really the combination of.
Thus the smoother capital recovery, but also gradual gradualism on the rate impact.
The ability to reflect the tax credit benefits immediately and then to increase some of the ownership benefits, which is going to provide long term benefits to customers. So the.
The details are things like the nuclear PTC and other things are still getting getting worked out and the regulations, but I think we do see some significant benefits and obviously it can be in other things like EV charging infrastructure and things like that.
Got it.
Okay.
The other question just in terms of thinking about 2023 earnings power guidance should we still assume that until the rate cases, largely finalized we.
You guys won't be providing 23 guidance.
Yes.
Andrew consistent.
Consistent with our practice in other rate cases, our plan right now is to not provide guidance, while we're pending in the rate case, though we certainly evaluate both our current year and future year guidance as we go through the year I think one of the big things that will.
Influenced that decision will be taken a look at the procedural schedule in the case and making a determination at that point about whether we are able to provide guidance 'twenty three.
It's really just once we get that procedure guidance.
Got it.
See what we can do and we will be able to update everybody on Q4.
As well as with drivers.
Got it thank you very much.
Yes. Thanks.
Thank you. Your next question is coming from Julien Dumoulin Smith from Bank of America. Your line is live.
Hey, guys. This is <unk> on for Julian. Thank you for taking my question.
It has to do with the proposed.
<unk> energy is not a new rider, but a modification to the existing one in the latest rate case filing can you maybe talk about given the fact that the one you proposed in the prior rate case received some opposition and ultimately.
It didn't get through can you talk about how you approach this.
Around differently, maybe what was modified.
And your level of confidence in getting support from the key stakeholders. This time around.
Hey, Dara as Ted Geisler here happy to address that.
We think there are several reasons why this really is an opportunity to create value for our customers.
It's more of an affordability opportunity for customers now than ever before and that is a big difference between this proposal the last rate case.
Couple of reasons that Jeff alluded to these one with IRA and now being able to pass through production tax credits to customers. This mechanism and using the existing renewable energy mechanism really provides an avenue for us to be able to pass on that savings to customers through without being able to include those carrying costs for capital investments there is no way.
And then pass on those clean credits and given that we operate in Arizona. Some of the best solar irradiance on the globe, we expect more production tax credits to be passed on to customers in just about any other area that you could install solar so.
A big benefit there and certainly those production tax credits didn't exist when we proposed less mechanism.
And then the other item that's noteworthy as we continue to operate competitive all source rfps and through those Rfps. We see the proposed projects and are able to identify that ownership opportunities provide tremendous value for customers. In addition to balancing that with continued long term ppas and so <unk>.
Hiding a mechanism allows us to continuously operate a competitive procurement process and ensure that we're always taking the best value projects for customers and passing those on in a timely manner along with the tax credits.
And just.
One other I mean, so I remember the proposal for the infrastructure tracker in the last case was broader. So this is really targeting clean clean energy investments, which is why it's tied to the renewable energies adjustment mechanisms. So again. These are these are different we've seen carrying cost come through the react before so it's not.
A new concept.
Thank you. Your next question is coming from Sean <unk> from Guggenheim Partners. Your line is live.
Hi, guys its James.
Sure how are you.
Hey, good how are you.
Doing well.
Last week's rate case filing you laid out quite clearly the importance of a higher ROE and you make the case for $10 two 5% today, you reiterated your 5% to 7% EPS CAGR through 2026 off of a $4.
In 2022.
Just staying high level and holding all else equal.
If the commission maintain your current eight 7% ROE is the bottom end of the range achievable or how should we think about how the ROE kind of plays in there.
Yes, Jim this is Andrew.
We look at the 5% to 7%.
As long term EPS growth rate range as well as the rate case.
Application both of those look at we look at Holistically, the 5% to 7% has.
Reasonable regulatory recovery through kind of the whole package of the rate case built into it. It also has our sales growth forecast in our O&M management built into it as well so.
A lot of components in there and it's really hard to parse those out either from a regulatory recovery perspective, where the components of that 5% to 7%, which we are as you said.
Reiterating this quarter yes.
Davidson as Ted I'll, just add to that the proposed ROE.
Has nothing to do with what would be required to achieve some earnings range. It's all based on the expert testimony of Dr. Martin and the factors that he concluded through the various.
Models that are run and introducing the testimony and so it's really based on his evidenced that is defining and defending the 10 five request.
Gotcha, Yeah, no I get that with the upper end there I guess, what I was wondering was sort of further to the point that you make in your testimony.
About attracting investment into the state and to the utility.
The current level of the ROE that the commission has set.
Is that.
<unk> that.
Is sufficient to get you there.
If it's not something that you're able to parse out and break out separately. That's fine I have a second question I can move on to but that's.
Just wondered if there was a straightforward answer to it or if it's not that simple.
No I think that's a great point I mean, two things we tried to make clear in the testimony is one given the growth. We're experiencing there is significant capital that we need to raise to keep up with the growth and we are very concerned and the ability to do that given the unprecedented low current Roe.
Second we are on negative watch by credit agencies, and this rate case and how the commission views.
Competitive and prudent return on equity is under careful consideration.
And so to the extent that you end up getting further downgraded that ultimately increases costs for customers. So theres, an opportunity to actually preserve our access to capital and mitigate future interest expense as we raise capital to keep up with customer growth, which is all part of why we believe the 10 five is a more appropriate ROE and then the current level.
Got it. Thank you that makes sense I'll move on to my second question here I appreciate the color.
Several other utilities have mentioned their pension headwinds for 2023 worse again over the past few months due to market performance can you remind us whether your rate case captures the entire year or if it will just be up until the June 30th test year.
<unk>.
And if it is just half of 2022 does that mean that there is.
I guess half a year of drag that would carry on until the next rate case or how should we think about what's incorporated.
Into the rate case, and would ultimately end up in rates and what isn't.
Okay.
Yes, Joseph Thanks for the question.
Our pension remains very well funded and we like others continue to watch the market and.
As seen in the market experienced losses across most asset classes this year.
Ultimately from a rate recovery perspective, we are in a split test year at June 30, and what's known today is the pension expense from year end 2021, when we get to the end of the year and we mark our asset to market and we know whether there are losses that need to be amortized, which just as a reminder, we use the quarter test.
And evaluate the materiality of those losses and those are then amortized over the average service life of.
Of our plan, which tends to be in the 10 to 12 year range, depending on plan at that point, we'll be able to.
Have a full sense for what the pension expense is going into 2023 and the last rate case is a baseline example.
We were also split test year and propose at that point, when we have that information in averaging of the two years, which.
To your question effectively blends and a half year of 2020 to impact when we get to the end of the year, we'll make a determination on regulatory strategy, but that last rate cases, and examples how we handled it.
A split test here.
Got it very clear. Thank you very much look forward to seeing you guys.
Thanks, Jeff.
Thank you. Your next question is coming from Sophie Karp from Keybanc. Your line is live.
Okay.
Alright, Thank you for taking my questions.
My first question is about I guess.
All the puts and takes in any case application here.
Hey, guys are proposing a lot of modifications and elimination of some type of mechanisms could you just maybe give us some rundown.
These changes would impact your ability to do.
Did you see regulatory lag.
Okay.
Yes, Sophie said here really the intent is to try to be responsive to the feedback we've gotten from the commission and stakeholders and simplify the adjusters. So.
When you think about the seven we have now.
Eliminating the environmental adjuster and LCR sweeping current balances in base rates.
A way to simplify that have less adjustments throughout the year.
<unk> adjust or largely remains similar to what it has been although has an opportunity to recover some of the fixed cost currently in the <unk>, but that would be combined with with other elements of the existing DSM mechanism.
The global energy Mecca.
Mechanism remains largely notice today other than expanding it to include of course, the carrying cost of new clean investments going forward as Jeff said PSA TCA remain the same.
<unk> team is focused on income tax adjustment. So as a result can remain in that at the time being so.
It's a good opportunity for us to be able to simplify the bill simplify adjustments throughout the year for customers to go from 17 down to the board.
Then.
Just focus on the base rate changes going forward.
And Sophie your point on.
It's important change here early on.
On addressing that would be the.
Using the renewable energy adjustment mechanism to both flow back the tax credits to customers, but then also to get more concurrent lean investment.
And Thats, what could help keep us from having to file rate cases more rapidly that's really the most important thing because as you have regulatory lag this year when it's actually on a more frequent basis.
So that that will be an important.
Just to be looking at to see if that can help us help us with more concurrent recovery and then hopefully get to push out rate case filings.
Awesome. Thank you and my other question is on O&M, So how rapidly the conditions are changing.
Market data.
Yes, I guess pertains to borrowing cost.
Oh, you ensure that your request.
Adequate for.
Yes, the environment that you might find yourself 60.
12 months from now.
How much confidence do you have that I guess a question you put in.
Going to be sufficient.
Given that we may see a cost any board environment.
Higher for longer.
Well there'll be prudent.
We're in a historical test year environment, and so the timing of this rate case was able to pick up the first half of <unk>.
<unk>.
<unk> expenses in 2022, but.
Ultimately, that's something that we rely more on our lean Sigma and internal cost discipline.
We continue to manage through those those challenges because you can't go really in a forward test year and say lets go proposed pro forma is and things like that for adjustments. So I think.
That's the nature of the jurisdiction that we're in but we manage that does help drive discipline on the cost management side and so it's really a similar concept on the borrowing cost side, we have a strong balance sheet, we're able to be flexible because of the liquidity we have to opportunistically issue that at times that the market is relatively favorable.
Certainly in a.
Increasing interest rate environment again, there you have a historical test year and when we look at the rate case, if you look at the WAC and so thats a combination of a number of factors not just interest expense, but the ROE and the cap structure. So that's an important piece of it as well, but as far as forward looking interest expense, we're fortunate to have no maturities.
Until the middle of 2024, and not a lot of floating rate debt. So it's really just a question of opportunistically raising debt at appropriate times to support the capex investments that we have to make and we have disclosed what our expectation is around does that needs.
Next two years.
Thank you. Thank you so much.
Yes, Thanks Avi.
Thank you. Your next question is coming from David Peters from Wolfe Research. Your line is live.
Yeah, Hey, good morning, everybody Hey, Dave.
Curious just on the election next week I note, it's inherently tough if not impossible to predict but I don't think theres any kind of pulling data at that level, but I'm. Just wondering if you could speak to kind of what you see currently up valid and is is it your experience that what happens they're typically informs the outcome the outcome.
Down ballot.
Yes, David.
A tough one in Arizona, particularly when you've got an election like this where I think most a lot of the polling is showing pretty close margins and different races, Arizona.
You do see things in Arizona, where people will tend to move around the ballot and so we've had cases before where we've elected a democratic governor, but had Republicans and kind of all of that both the Senate seats.
And I think your point is probably the most relevant for the Corporation Commission elections is that Theres not a lot of polling that's done down at that at that level and so our strategy is always to work with all of the potential candidates to make sure we've met with them to make sure that we're.
Informing them on kind of our plans and how we see the how we see the world because at the end of the day, you've got to work with whoever get selected.
Yeah that makes sense.
Another one I had was just on the composition of the O&M increase you know obviously I think he is.
Andrew you spoke to just inflationary pressures, but then there's also a piece just kind of required to keep up with the growth you guys are seeing and I think you also said you pull forward some.
From 23 to Derisk future periods. So could you just kind of help parse that out a little bit.
Sure David Yes, so as I mentioned you captured the key factor. We also had as Jeff talked about some historic storms in there. So there's a lot of factors driving.
O&M this year and the way, we think about it in that move in our guidance range up to that 80 to $82 95 is.
When we think about the the efforts we are taking to mitigate some of that some of that cost inflation you compared to actual 2021 O&M to the new 'twenty two guidance range of that midpoint youre talking about or.
Just over two 5% increase year over year, so our cost mitigation efforts as at the same time as you alluded to we.
Forward, some spending de risk from future your O&M kind of.
Create quite a few puts and takes in that number. So we're really focused because of the growth in our service territory and where we have to spend there is continuing to moderate O&M on a per kilowatt hour basis, and making sure that we're remaining efficient and I think that will be a good measure if O&M sustained at these levels or increases because we are serving a larger service.
Tori that were remaining efficient about that spend it's it's really hard to parse out the different pieces, because we were responding.
We do a lot of factors the market both a local service territory, where inflation is high but also in the national market, where we compete to buy some of our products and services. So see a lot of factors at play.
The increased range is sort of a combination of all those factors net of the mitigation efforts that we've taken this year, which we think have been pretty successful in blunting the impact of the higher O&M.
Thank you for that just one more quick one if I could just on the capital plan I'm just curious to get kind of your latest view on just your base needs to support what seems like.
And even stronger sales growth outlook now are those levels pretty conservative just as they kind of sit on your slides today or I guess, just when do you think you'll be in a position to maybe update that and then also I guess anything.
T related from <unk>.
Benefits.
Yes.
Yes, David.
That capex level is really baseline of where we are today and what it takes into account is that we are signing quite a few ppas to response to reliability need and the customer growth and so.
Yes.
Our capex incrementally if you think about Capex plus the PPA is resigning.
Pretty materially larger number we're fortunate to have the PSA mechanism as a way to recover some of those PPA costs as we work through this rate case, and a path to more predictable regulatory recovery, but the numbers that are in there are kind of reflective of the current baseline and we'll continue to evaluate the capital plan you will see the results of Rfps and that will allow us even while we are in the rate.
Case to adjust our capex forecast going forward, but the rate case outcome will ultimately be the best indicator for us to take a look at that balance ppas and self build assets and what that means for the generation capex going forward.
Okay. Thank you.
Thank you once again, ladies and gentlemen, if you have any questions or comments. Please press Star then one on your phone at this time your.
Your next question is coming from Paul Patterson from <unk> Associates.
Your line is live.
Hey, good morning.
Hey, Paul.
Hum.
One of the questions have been answered.
Just back to the rate case.
I apologize if I missed this but the team the tax adjustment tax expense adjuster mechanism.
To maintain it as.
Inactive.
I'm just wondering how that either plays with.
With the renewable energy.
Adjustment charge and I think you mentioned the tax benefits moving through that and I'm just sort of wondering.
While maintaining as inactive or how would that how would the team have worked.
If it was active.
Regarding the Ohio Valley and what have you.
Yes, Paul as Ted I. Appreciate the question team was really established narrowly to focus on adjustments and income tax level. So largely to pass on federal tax reform focused on income tax changes.
As.
The production tax credit opportunity that we have in front of us for future solar investments as a result of IRA.
<unk> intended to be constant ongoing and tied to the production levels of solar that is procured and ultimately we would propose recovered through that react.
Adjusters, so as you recover costs for the new solar facilities. The intent would be you offset those costs in part by passing back the production tax credits from those same facilities through the same mechanism and we believe that to be materially different than what <unk> was originally set up for which is limited to income tax adjustments.
Okay, I think I understand but why maintaining as inactive I guess, so I mean, it's.
Cases future tax reformer.
That's exactly right.
Okay.
Then.
In terms of the react and what have you.
You mentioned the benefit in terms of regulatory lag for.
Customers would there be any potential regulatory any potential regulatory lag.
The reduction benefit for shareholders as well.
Yes, we certainly would expect it to improve regulatory lag.
Four our ability to continue to finance these investments and ultimately.
That benefits the company and customers both in terms of rate gradualism, but also likely could extend out or delay what otherwise would need to be a rate case to recover those costs.
Okay. Thanks, so much.
Thanks, again and have a great yeah. Thanks, Paul.
Thank you that concludes our Q&A session, ladies and gentlemen. This concludes today's event you may disconnect at this time and have a wonderful day. Thank you for your participation.